Focusing on Volatility Information Instead of Portfolio Weights as an Aid to Investor Decisions

39 Pages Posted: 9 Oct 2014 Last revised: 3 Sep 2020

See all articles by Christian Ehm

Christian Ehm

University of Mannheim - Department of Banking and Finance

Christine Laudenbach

University of Bonn

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: July 31, 2017

Abstract

When faced with the challenge of forming a portfolio containing a risky and a risk-free asset, investors tend to apply the same portfolio weights independently of the volatility of the risky asset. This “percentage heuristic” can lead to different levels of portfolio risk when the same investor is presented with a more or a less risky asset. Using three experiments, we show that asking investors to choose the return distribution for their portfolio while keeping the exact portfolio weights unknown leads to greater similarity in levels of portfolio volatility (across different levels of risk of the risky asset) than asking investors to choose this distribution while additionally facing the portfolio weights. Higher consistency in risk taking is obtained both between and within test subjects.

Keywords: portfolio choice, risk-taking, volatility inadaptability, risk perception, 1/n heuristic

JEL Classification: G11

Suggested Citation

Ehm, Christian and Laudenbach, Christine and Weber, Martin, Focusing on Volatility Information Instead of Portfolio Weights as an Aid to Investor Decisions (July 31, 2017). Available at SSRN: https://ssrn.com/abstract=2507686 or http://dx.doi.org/10.2139/ssrn.2507686

Christian Ehm

University of Mannheim - Department of Banking and Finance ( email )

L5, 2
Mannheim, 68131
Germany

Christine Laudenbach (Contact Author)

University of Bonn ( email )

Bonn, 53113
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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